Accounting: The Language of Business - Vol. 2 (Intermediate: Part 75)

The Macau casinos have a wonderful business, it's taking in money from Chinese businessmen elsewhere who send it through junky companies to casinos to gamble. The growth continues and they have basically western managers and western accounting, so we trust the numbers a little bit more.

James Chanos

Statements of Financial Position and Cash Flows and the Annual Report (Part M)

by

Charles Lamson

Notes to the Financial Statements

The notes (or footnotes) are an integral part of the financial statements that provide descriptive information regarding a company's accounting policies, supplemental disclosures of items not reported on the financial statements, and additional  details for transactions reported on the four main financial statements. For example, a company will disclose its depreciation policy for long-lived assets in its financial statement footnotes. A company could also provide additional disclosures on historical cost and accumulated depreciation according to significant types of assets. Notes to the financial statements are typically extensive.

Subsequent Events. A subsequent event is a significant event that occurs after the date of the fiscal year end but before the financial statements are issued or available to be issued. Examples of subsequent events are the sale of a business, the issuance of debt or equity securities, and the settlement of litigation

Firms either recognize material subsequent events in the financial statements for the preceding year or disclose them in the notes to the financial statements. The recognition versus disclosure depends upon whether the event relates to a conditiuon that existed on the balance sheet date (the end of the fiscal year):

1. If a condition existed as of the balance sheet date, the firm should make an adjustment to the financial statements to account for the subsequent event.
2. If the condition did not exist as of the balance sheet date, the entity is required to disclose only the subsequent event as opposed to adjusting the financial statements.

In its fiscal 2015 annual report, Wal-Mart, Inc. (Walmart) reported a subsequent event for dividends declared after year-end. (see Exhibit 6.16).

EXHIBIT 6.16  Subsequent Event Disclosure, Wal-Mart Stores, Inc., Financial Statements, January 31, 2016

Going Concern Uncertainties. The going concern concept indicates that accountants record transactions and prepare financial statements if the entity will continue to operate for an indefinite period of time unless there is evidence to the contrary. Management must evaluate whether there is a substantial doubt as to whether the entity will continue to operate within one year after the financial statements are issued. If substantial doubt does exist, then management must consider any plans it has to mitigate the entity's going concern issue. If it is probable that these plans will be implemented and will alleviate the conditions that raised doubt about the entity's ability to continue operating, then the entity must disclose information about:

• The conditions or events that raised substantial doubts about the entity's ability to continue operations.

• Management evaluation of the significance of these conditions.

• Management's plans that alleviate substantial doubt about the entity's continued operations.

If conditions exist that raise substantial doubt about the entities ability to continue as a going concern and this doubt is not alleviated by management's plans, then the entity must disclose that there is substantial doubt about the entity's ability to continue as a going concern within one year from the date that the financial statements are based (or available to be issued). Additionally, the entity should disclose information about:

• The conditions that raise substantial doubt about the entity's ability to continue operations.

• Management's evaluation of the significance of those conditions.

• Management's plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity's ability to continue as a going concern:

Related Party Transactions. Related party transactions are transactions that an entity engages in with owners, firm management, affiliated entities, or any other entity that can exert significant influence on the company (The complete list of related parties can be found in FASB ASC 850-10-20, Related Party Disclosures-Overall-Glossary).

FASB requires disclosure of related party transactions because it is possible that the transaction was not objective and not completed at market prices. For example, if a corporate officer borrows funds from her employer, she may do so below the market rate of interest. The disclosure of a related-party transaction must include:

1. The nature of the relationship.

2. A description of the transaction.

3. The amount of the transaction.

4. Any amounts due from or to related parties.

Exhibit 6.17 presents part of the disclosure provided by Luby's, Inc., the restaurant operator, related to the CEO and CFO's transactions with the company, including owning two Luby's restaurants.

EXHIBIT 6.17 Related-Party Transaction Disclosure (partial), Luby's Inc., Financial Statements, August 31, 2015

Source: Luby's Inc, 2016 Annual Report 

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., P. 259*

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